Pentagon cuts cost of F-35 fighters by 4 percent: sources

WASHINGTON | By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon will pay about 4 percent less for each new Lockheed Martin Corp (LMT.N) F-35A fighter jet when it signs a deal worth $3.8 billion with the No. 1 U.S. defense contractor on Friday, according to sources familiar with the deal.

Each of the 22 conventional takeoff and landing jets in the fifth production contract will cost around $107 million, excluding the engine, said the sources, who were not authorized to speak publicly.

That compares to a price of $111.6 million for the F-35As to be used by the Air Force that were included in the fourth contract with Lockheed.

The contract for 32 jets also includes 3 B-models for the U.S. Marine Corps, which can land vertically, and seven C-models to be used on aircraft carriers for the U.S. Navy.

The Defense Department is negotiating a separate contract with Pratt & Whitney, a unit of United Technologies Corp (UTX.N), for the engines that will power the new warplanes. Pentagon officials hope to conclude that deal by year end.

A senior defense official said the Pentagon plans to sign the deal with Lockheed on Friday, a long-awaited agreement that moves forward the most costly weapons program in U.S. history and should make future negotiations easier.

The deal gives Lockheed a 12-percent profit margin, according to Loren Thompson, a defense consultant with close ties to the company.

Lockheed shares closed 19 cents or 0.21 percent lower at $91.81 on the New York Stock Exchange on Wednesday.

The government also expects to reach an agreement soon with Lockheed on early funding for a sixth group of F-35s, a step that could help reduce a potential $1.1 billion liability the weapons maker faced from work it had already done on the jets without a signed contract, the official said.

The final amount of the contract will be determined on Friday, since it must factor in the exchange rate of the British pound, said the official, who spoke on condition of anonymity.

The Pentagon announced on November 30 that it had reached an agreement in principle with Lockheed on the fifth production contract after a year of arduous negotiations, saying it aimed to finalize terms by the end of the year.

The contract will also pay for manufacturing support equipment, instrumentation for flight testing and other mission equipment needed for the new radar-evading warplanes.

Signing the contract before year-end will safeguard funds for the F-35 from $52.3 billion in automatic budget cuts due to kick in on January 2 for fiscal 2013 unless Congress acts.

It also will allow Lockheed and its suppliers on the program -- Northrop Grumman Corp (NOC.N) and Britain's BAE Systems Plc (BAES.L) -- to log additional orders in their 2012 results.

Thompson said the new unit cost of the A-models included $95 million in the actual cost of the planes, a 12 percent profit margin for Lockheed, plus some funds for retrofits to address problems discovered during testing, which is ongoing.

"This represents a moderate reduction in the cost of each plane," he said.

Lockheed officials had said last month that the company expected to reduce labor costs by 14 percent from the actual costs of the fourth lot.

Separately, Canada -- one of the eight international partners helping to develop the new plane -- on Wednesday scrapped a controversial plan to buy 65 F-35 jets from Lockheed, saying that it would evaluate all available options for acquiring new fighter jets.

The Conservative government said an independent panel would look at possible replacements for the country's aging fleet of CF-18 fighters, but could still buy the F-35 if it turns out to be the best option.

Pentagon spokeswoman Lieutenant Colonel Melinda Morgan said Canada remained a partner in the F-35 program. She said the review Canada was now undertaking was similar to one run by the United States in 2010, which found no alternative fighter that could provide the necessary capability at lower cost.

"We look forward to working with our Canadian Partners, along with the other partner nations, to drive to affordable acquisition of the F-35," Morgan said.

Canada's decision to launch a new competition is not expected to have much short-term impact on the F-35 program since Canada was only slated to start buying jets in several years.